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The downside of being upbeat: The effects of consumer optimism on real economic activity

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  • Edda Claus, Viet Hoang Nguyen

    () (Wilfrid Laurier University)

Abstract

Using a quarterly consumer survey, we propose two novel measures of consumer optimism, ex ante optimism and ex post optimism. We demonstrate that excessive optimism about future family finances impacts the real economy. The excessive optimism (ex ante optimism) compels consumers to save less and borrow more, putting upward pressure on consumption growth. When family finances improve persistently less than expected (ex post optimism), consumers cut back on credit and save more which puts downward pressure on consumption growth. This saving and borrowing channel of the optimism bias is robust to age and income.

Suggested Citation

  • Edda Claus, Viet Hoang Nguyen, 2019. "The downside of being upbeat: The effects of consumer optimism on real economic activity," LCERPA Working Papers 0117, Laurier Centre for Economic Research and Policy Analysis, revised 01 May 2019.
  • Handle: RePEc:wlu:lcerpa:0117
    Note: LCERPA Working Paper No. 2019-1. Online appendix is available at http://www.lcerpa.org/public/papers/LCERPA_2019_1_onlineappendix.pdf
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    More about this item

    Keywords

    Cognitive Bias; Saving; Borrowing; Consumption; Expectations Survey Data;

    JEL classification:

    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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